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Like a Rolling Stone - With Sanctions in Place, Russia's Oil-and-Refining Sector Faces a Slow, Steady Decline

Russia’s invasion of Ukraine in February 2022 set off a wave of repercussions in energy markets and economies the world over. The hope of the U.S. and its allies has been that international pressure and mounting sanctions would cause Russia to swiftly end the war — or at least make it very difficult to finance. But while the war rages on and Russia seems to be coping with the short-term impacts reasonably well, the long-term effects on its energy sector could be much more significant. In today’s RBN blog, we look at how Russia’s twin challenges — finding buyers for its crude oil and its refined products — are more different than they might seem and why Russia’s oil-and-refining sector is in the early stages of a sustained slowdown.

The U.S. was among the first to respond to the invasion with sanctions, announcing just days after the war began that it would prohibit imports of Russian oil and certain refined products (along with LNG and coal) and ban U.S. investment in Russia’s energy sector. Similar measures were soon adopted by Australia, Canada, Japan and the UK, and Russian banks were banned from the SWIFT system, which enables financial transactions and plays a key role in the global oil trade. In addition, integrated oil companies such as BP, Equinor and Shell announced their intention to exit upstream oil and gas projects in Russia. The U.S. and the UK also rolled out foreign investment restrictions on several Russian companies and key figures in Russia’s energy industry were targeted for individual sanctions, including Igor Sechin (Rosneft), Nikolai Tokarev (Transneft) and Vagit Alekperov (Lukoil). We’ve written extensively about Europe’s move away from Russian natural gas and the resulting impact on global LNG trade, but sanctions have also targeted several other sectors (more on those in a bit).

In terms of a global reaction, the most expansive measures target Russia’s crude oil and refined product exports and are intended to diminish Russia’s ability to execute its war in Ukraine. The efforts targeting Russia’s crude exports may have gotten the majority of the headlines since last year, but it’s the sanctions on refined product exports and other measures that have Russia set up for significant long-term challenges. Let’s look at both of those efforts and see why their impact on Russia might be so different. (For more on the refined product market, check out The Future’s So Bright and the new Future of Fuels report from RBN’s Refined Fuels Analytics practice.)

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